Business

Goldman’s Alpha War

Steve Friedman’s decision to quit as chairman of Goldman Sachs, in 1994, during one of its darkest hours, stunned and angered his partners. And despite Friedman’s maneuverings, it created a leadership crisis as the mismatched team of Jon Corzine (future New Jersey governor) and Henry Paulson (future Treasury secretary) took the helm. In an adaptation from his book on Goldman, William D. Cohan reveals how secret merger discussions put the expansive trader and the hardheaded banker on a collision course, setting the stage for the firm it would soon become.

TWO’S A CROWD Henry Paulson and Jon Corzine in the firm’s Manhattan offices in 1998, when they became co-chairmen, after Paulson exposed to the Management Committee Corzine’s secret merger talks with Mellon Bank. From A.P. Images.

As 1993 was drawing to a close, Steve Friedman had had just about enough. He had joined Goldman Sachs in 1966, ran its world-class M&A group for years, served as its co-chairman with Robert Rubin between 1990 and 1992, and then headed the firm alone after Rubin left to be part of the Clinton administration. Especially this last job—being the sole senior partner at Goldman Sachs—had taken its toll on him. Whereas once he could divide up international travel and flag-waving with Rubin, now, at 55, he was on his own. There were questions about both his physical and mental health. People would often come up and tell him he didn’t look so well. He knew he felt tired, but began to think there was something more to his chronic fatigue. Occasionally, when he traveled, he would experience heart arrhythmia, when his heartbeat would speed up dramatically and uncontrollably. This made him nervous about flying—something that others noticed.

But Friedman kept forging ahead and, for the longest time, failed to have his ailments checked by a physician even though he was a former college athlete and knew better. He understood that his predecessors had literally worked themselves to death—former senior partner Sidney Weinberg died soon after retiring in 1969, and his successor, Gus Levy, had died in office, so to speak. “I had no desire to die in the saddle and no desire to get greener and greener in the saddle,” Friedman says. “But also, hey, there’s a lot of other stuff out there in the world. And I’d like to have time to think about it and explore it. It’d be kind of sad if you were just doing the same thing over and over.”

Whatever the reason—health, fatigue, exasperation, or perhaps some revisionist history—Friedman decided at the beginning of January 1994 that he would retire at the end of the year. “I wanted to do it young enough so that I could do something else with my life,” he says. He told his wife, Barbara. He told Bob Rubin, then at the White House (but not yet President Clinton’s Treasury secretary), over dinner in Washington. And he told Bob Katz, Goldman’s general counsel, who, following tradition, had come from the white-shoe law firm Sullivan & Cromwell. He decided not to tell anyone else, including the other Goldman partners, so that he wouldn’t become a lame-duck executive; instead, he would drop vague hints here and there that he might be starting to think about moving on.

He hoped to designate Hank Paulson, a highly respected investment banker from Chicago, as the firm’s next senior partner. Friedman and Paulson were simpatico—as an M&A banker and a client banker would be—and Friedman had a deep regard for how highly Paulson’s clients respected him and sought his counsel. “Hank would be the first guy to tell you that he’s not Mr. Smooth,” Friedman says. “He just happens to be a terrific talent, and I noticed early on that here was a young investment banker and the leading C.E.O.’s in Chicago were leaning on him.”

C.E.O.’s would ask to speak with Paulson privately and not just rely on him to “deliver the firm” by making sure teams from M&A or equity-capital markets were available. “That’s heavy,” Friedman says. “And he was smart, and it used to irritate the merger guys because after he’d heard their pitch at board meetings a few times he could do it himself just as well.” Starting in 1990, Paulson was one of the three heads of investment banking at Goldman, with Mike Overlock, who had been running the merger department, and Bob Hurst, who had been running the investment-banking-services group. Paulson spent huge amounts of his time establishing Goldman’s presence in Asia, especially in China, where he had befriended the country’s leaders and perceived its potential as a business opportunity for clever investment bankers. He and two other senior partners were known as “the Three Nots”—“not here, not smart, and not nice.” Paulson was “not here,” in that he lived in Chicago and spent so much time in Asia.

Just as Friedman was deciding to retire, Paulson coincidentally told him he was thinking of leaving Goldman. They were having a telephone conversation one weekend, while Paulson was at his modest home in Barrington, Illinois, on a five-acre plot of land he had bought from his family’s nearby farm. “[I mentioned I might leave] not because I wanted a promotion,” Paulson says, “but [because] I’d had opportunities to do a couple other things. I was questioning whether I might want a different career, as much as I liked Goldman Sachs.” He had been approached about being the dean of a few business schools and about being a senior executive at an industrial company. These jobs might give him more time to indulge his lifelong passions for conservation, bird-watching, and fishing. And he dreamed of writing novels. “I’d have liked to have been another Faulkner, of course,” he says.

Knowing Paulson’s departure might foil his own plans and be a major loss to the firm, Friedman invited Paulson and his wife, Wendy, to have dinner with him and Barbara next time he was in New York. At that dinner, Friedman dropped a few not-so-subtle hints. “Gee, I might not be here forever,” he told Paulson. “I’m looking to you for the future.” But Paulson missed the message, especially since Friedman had been running the firm by himself only for a year or so. “So, you just have to understand from my perspective I thought, ‘Well, that just meant he wasn’t going to go out with his boots on like Gus Levy,’ ” Paulson says. In any event, Friedman could not sell the idea of Paulson to Katz, who didn’t think Paulson had enough political support on the Management Committee to be the sole leader of the firm.

So Friedman took a new tack: he started to urge pairs of partners to work together on various projects to see if any two of them would gel the way he and Rubin had. In particular, he told Paulson to work with Jon Corzine, a former government-bond trader who had worked his way up to be co-head of fixed income (with Mark Winkelman). This felt a bit awkward to Paulson. “I would come to New York, work, and then get out of New York,” he says. “I didn’t go out to dinner with other people on the Management Committee. I didn’t socialize. I didn’t politick.” Friedman kept urging Paulson to be more sociable. “He started saying to me, ‘Well, I’d like you to get to know Jon Corzine better,’ ” Paulson recalls. “ ‘I’d like you to know Jon Corzine. Spend time with Jon Corzine.’ And I was a little thick. And then finally he said, ‘You like Asia. He likes Asia. Why don’t you two take a trip together through Asia?’ ”

Paulson missed the purpose of this message, too. “We were both interested in Asia,” he says of himself and Corzine, “and with his understanding of the trading and the sales side, I took it as the two of us going around and sending the right signal to people there. Not that ‘Gee, we should be cooperating better or working better together when we made these business decisions in Asia.’ It hadn’t occurred to me that we were going to be joined in some way to help run the firm.”

Wrong-Way Bet

Much of this social calculus quickly got pushed to the back burner as the firm’s traders started to stumble—badly—racking up losses during 1994 of $100 million or more a month. “I don’t like the feel of this,” Friedman remembers thinking. “Our trading is not right, and they think they’re better than they are. They did real well in 1992 and 1993, but I think they were shooting fish in a barrel.” Especially on the heels of the huge profits the year before—some $2.7 billion, the most profitable year ever at the firm until then—these ongoing losses rattled the firm’s partners and raised the question for the first time about how the loss of Rubin was affecting Goldman. “They were a great pair,” one partner says of Rubin and Friedman. “They trusted each other, liked each other, collaborated. They complemented each other. Bob understood the sales and trading much better than Steve. It didn’t seem that disruptive when Bob left, because the firm went on to have these fabulous years. But then we had the significant trading losses.”

What tripped up Goldman’s traders was a massive wrong-way bet on interest rates. “Credit spreads just blew out,” Paulson explains. In February 1994 the feds raised interest rates, and “it just completely fucked up the firm’s trading position,” recalls another Goldman partner. “The firm didn’t really know what the risks were.” By the following summer, as the trading losses mounted, Friedman was increasingly frazzled. Bob Hurst remembers seeing him in Jackson Hole, Wyoming, where Friedman had a home, and thinking that the senior partner was hurting. “ ‘Your job’s impossible,’ ” Hurst recalls telling Friedman. “ ‘I have no interest in it.’ I said it from a perspective of I thought he had a couple of years to go and not that he was quitting that fall.” Another partner puts it bluntly: “Steve hated his job as C.E.O. He hated it because he felt he had lost control of his life.”

Hurst remembers hearing about a telephone call between Friedman and Corzine in which Corzine told Friedman that another $50 million had been lost in London that week. Friedman was trying to get Corzine to cut back the trading positions. “He just won’t do it,” Friedman told Hurst. “He says it’s a great trade.” Part of the problem for Friedman was that, without Rubin, he was not expert enough in fixed income to know for sure whether to overrule Corzine. In any event, 1992 and 1993 had been such amazingly profitable years in fixed income that Corzine would have been difficult to overrule anyway.

As the year dragged on, the pain across the Goldman partnership became more acute. “Every month, Corzine and Mark Winkelman would stand up and say, ‘I’m sorry, guys. We’ve lost another 150 million bucks,’ ” says one partner from the banking side of Goldman. “My capital account in 1993 was $7 million, something like that. And it went down to $4 million. Every month, it went down $300,000, $400,000. And you’re just saying, like, ‘What the fuck? This is unbelievable.’ It was pretty out of control People were just completely off the reservation.” There was a growing concern among the partners that because their liability was not limited their entire net worth was on the line.

Toward the end of August, Friedman’s hints about his future were becoming less opaque. Corzine remembers a conversation he had with Friedman in the late summer that left him “with the idea” that the senior partner was getting ready to retire. “We had an indirect conversation that led me to believe that my promotion was what would take place,” Corzine says. “Steve did not feel well,” he continues. “You could see it on his face as we were trying to get our world squared. It wasn’t obvious that it was only a health issue that was troubling him. This was another one of those times when people who run firms that take on risk … they may earn a lot of money, but they earn their keep.”

Throughout 1994, Friedman and Katz had a number of dinners to discuss how the succession plan at the firm would unfold. They chose to meet in offbeat neighborhoods around New York, where, they assumed, few Goldman partners would be hanging out. For the first dinner, they chose an Italian restaurant on West 17th Street, far from the usual haunts of the Upper East Side, but were interrupted by a partner who was dining there.

By discussing repeatedly how the announcement should be made and how the new senior partner should be selected, Friedman and Katz were hoping to sidestep the internecine political warfare that generally accompanies Wall Street successions. “I wanted to avoid anything that was political, and I wanted to give myself and other Management Committee members the opportunity to continue to evaluate how different people worked together,” Friedman explained to Institutional Investor in October 1994. “We had seen numerous firms in which the succession dragged on and had been the subject of rumors and, thus, divisions, or where they had a long, drawn-out transition with too many hands on the steering wheel. We were convinced our firm could avoid that.”

Friedman had wanted to drop his bombshell in August, but after conversations with Katz and Rubin, he decided to wait until Labor Day, when everyone would be back in New York after their summer vacations. On Tuesday, September 6, calls went out to the Management Committee to make sure they would be in New York the next day. “I had no special call from Steve,” Paulson says. “No warning. We were told we were supposed to be there. He wanted us all there.” Usually, Paulson would join the Management Committee meetings by videoconference from Chicago, where he would often forget that he was on-camera and start reading the newspaper. Someone in New York would step out of the meeting to call him and say, “Don’t forget you’re on the screen, Hank. Stop picking your nose.”

This time, “I knew something was up,” Paulson says. When everyone had assembled, Friedman told his most senior partners that he planned to retire and to name his successor, or successors, within the week. “It was an enormous shock,” says Hurst. Another partner told Friedman to stop joking around. “I’m not kidding,” Friedman said. Paulson could not believe what he was hearing. Had Friedman lost his mind? Right afterward, he went to see Friedman, alone. “You can’t leave right in the middle of all this,” Paulson says he told him. “You’ve got to stay for a transition.” Friedman then told Paulson about his heart ailment. Paulson was shocked, but didn’t say much. “Steve looked younger than I did,” recalls one Management Committee member. “He was vigorous. I had no idea until he told me about the problem. And so it just came as a shock The pressure was immense. I think people who criticize him and come down hard on him for it—[former senior partner] John Weinberg and others did—never knew what he was going through, never walked in his shoes.” After the meeting Barbara Friedman was especially concerned that her husband had been crystal clear that his decision was final. He assured her that he had been.

Despite the best efforts of Friedman and Katz to plan the succession, it didn’t work out so smoothly. Other leadership changes at the firm had been equally sudden—for instance, after Levy’s death, in 1976—but then the successors had been carefully groomed or were obvious. Not in 1994. A power struggle ensued, unlike any other in the firm’s long history. What made the situation even more intense was that Friedman told the group that he intended to announce the new leadership team at the regularly scheduled monthly partners’ meeting the following Monday, five days later. The decision had to be made by Sunday night.

Although the Management Committee had 12 members at the time, there were only a handful of likely contenders to lead the firm: Paulson was a proven rainmaker, but his support was limited to the investment bankers. His co-heads of investment banking—Hurst and Overlock—were possible, too, but considered long shots. (Hurst especially had doomed his chances after he had casually confessed to Friedman in Wyoming that he didn’t want the job.) There was also Roy Zuckerberg, who, at age 57, was the oldest member of the Management Committee. But although he wanted the job, few saw him as anything more than a self-promoter and an interim solution. Corzine and Winkelman, the co-heads of fixed income, were serious contenders, despite presiding over the huge losses the firm was then experiencing. Winkelman was known by some at the firm as “the grim reaper” for personnel cuts he had made at J. Aron, the commodities trading firm Goldman had bought in 1981, but he was highly regarded not only for the turnaround he had engineered at J. Aron but also for the success the firm had enjoyed in fixed income in 1992 and 1993. He had been appointed co-head of fixed income, in part, to tame some of Corzine’s more reckless trading instincts. “Mark had turned out to be enormously talented,” Rubin recalls, “and although I was responsible for [J. Aron], Mark was the one who really went around and figured out how to reposition the company so it became an immensely profitable activity.”

Power Vacuum

This fierce jockeying for power provoked comparisons between Goldman’s Management Committee and the Vatican: people were looking for puffs of smoke. Friedman admitted as much. “Our Management Committee is like a college of cardinals,” he told Institutional Investor in October 1994. “They’re very talented people, and in the college of cardinals, a substantial number of them have a reasonable, legitimate belief that they should be elevated. I’d be wary of a firm that didn’t have a large number of people with the self-confidence to think of themselves as capable of taking the top job. I think that’s an absolute sign of strength.”

To a number of the Goldman intelligentsia, the choice of Paulson seemed implausible. “You’ve got to recognize I was in Chicago,” Paulson says. “People didn’t know me very well. I didn’t look like an investment banker, didn’t dress like an investment banker, didn’t talk like an investment banker, was rough around the edges, and had a lot to learn. I questioned, frankly, that maybe I wasn’t ready, but I was sure a lot readier to run the firm after being in New York and in the trenches there for a few years than I was stepping right in from Chicago.” His bull-in-a-china-shop demeanor didn’t help. In addition, he had little understanding or knowledge of the trading side of the business. But he was a major producer of banking business. “Hank had the nerves of a bandit,” remembers Rob Kaplan, a former vice-chairman at the firm.

Paulson had always cultivated Friedman. The two were friends, having found common ground as athletes. Indeed, at an off-site in New York’s Westchester County a few years after Paulson had joined Goldman, Friedman, once a national wrestling champion at Cornell, challenged Paulson, a former all-American lineman at Dartmouth, to a wrestling match. Paulson had done some intramural wrestling at Dartmouth, but hadn’t really wrestled since he was 18. Still, he took one look at Friedman, who was smaller and lighter, and felt a bit sorry for him. Unbeknownst to him, however, Friedman was still working out regularly with the Cornell wrestling team at the Downtown Athletic Club. “So I took him down, very quickly, with the fireman’s carry,” Paulson recalls. “The next thing I knew I was on my back. I’d never been pinned before. So I got angry. I thought, ‘This little guy, I don’t care if he is my boss, I’m going to pick him up, and I’m going to hurt him.’ I went back at him about five or six times. And I got pinned five or six times. The next morning when I was trying to get out of bed, it took all my pride and everything else to pretend like nothing had happened and to get out of bed and get dressed and get out there.” Fortunately, his business suit covered up his bruises and scrapes.

Friedman flew down to Washington and met Rubin at the White House to discuss the leadership matter, and Rubin agreed that Paulson was the right man to lead the firm. After that, Friedman approached Paulson. “He immediately made the pitch to me in the first meeting,” Paulson recalls. “He hoped that I’d be one of the people that came and ran the firm. I was so taken aback and shocked by the whole thing that I just couldn’t get my mind around it. I said ‘Good-bye’ to him and literally left. Didn’t talk to anybody else. I got on a plane and flew back to Chicago.” He called Wendy from the car and told her what had happened. “In the worst way she didn’t want me to do it,” he says. “I told her I thought it was very unlikely that I would. And that I thought there would be other people chosen.” But, false modesty aside, Paulson did want the job as much as anyone else did.

Friedman told the Management Committee he wanted to meet, individually, with each member to go through the usual “crossruffing” of having them share their ideas. He encouraged them to meet among themselves as well. But they were still stunned and angry. “It took a number of the Management Committee partners by complete surprise,” one senior Goldman executive explains. “I know that they were very angry. They expressed that anger to me. I was sort of surprised how angry they were. They felt that 1994 was not a great year for the firm, and they felt that the firm was in real trouble. They needed stable leadership through the crisis, and they weren’t getting it from him. They felt that he had left at the most inopportune moment.” At one point, someone overheard David Silfen, another member of the Management Committee, say to Hurst, “I knew this was going to be a bad year, Bob, but honestly, I had no idea how bad it would get.”

Hurst read the tea leaves quickly. “Corzine was a given,” he says. “There was no issue, I don’t think, about Corzine. Corzine wanted it. He was very aggressive about wanting it. He was our chief financial officer, and he was co-head of the biggest division. Fixed income had to be represented in the equation. Jon was very personable and he was a man of the people Then the question was what’s the permutation? Is it co-heads? Is it one and two?”

Soon a consensus emerged that some combination of Corzine and Paulson should lead the firm. “There was no one, or virtually no one, other than Corzine or Paulson who would have had any votes for the job from someone other than themselves or from someone other than their best crony,” Friedman recalls. “What you could safely say is, there would have been no broad support for anyone other than those two, and Corzine was accepted by most people as a part of the solution. Remarkably, though, even by people who felt that way, it was ‘But you have to have someone strong paired with him.’ I recollect no one other than Corzine being comfortable with Corzine alone. And most people thought Hank was the strongest one to be partnered with him.”

The only open question, then, was whether the two men could figure out an arrangement between themselves. Friedman urged Paulson to call Corzine. Paulson placed the call, but Corzine didn’t return it. “It was pretty clear to me that he wanted to do it by himself,” recalls Paulson. “I was really quite unsettled by the whole thing. Steve leaving so suddenly and the need to select new leaders in a week affected me.”

On Saturday, Friedman met with Corzine and Katz at his large Beekman Place apartment, overlooking the East River. There Corzine announced that he wanted to run the firm as C.E.O.—even though the title made no sense in a partnership—and would accept Paulson as his chief operating officer. “They nurtured me all along,” Corzine says. “They put me in the C.F.O.’s position. They took me out of the trading room and had me talking to banks and other stakeholders. I began to recognize that they were thinking of me in bigger terms. It’s a little bit like running for political office: you think, ‘Maybe I have a chance to win the primary, maybe I have a chance to win the election. But nothing in life is certain.’ ”

Friedman urged Paulson to have breakfast with Corzine, which he did on Sunday morning, at the Pierre hotel, on Fifth Avenue, where Paulson was staying. “When you spend time with Jon you’ll see he’s a very charming guy, incredibly charming,” a Goldman partner says. “But he’s very indirect.” At the breakfast, Corzine told Paulson, “I’ll be the best partner you ever worked with.” He explained he wanted to be the C.E.O., and he wanted Paulson to be the C.O.O. “I remember being willing—not because I was so eager to run the firm, but because that was what I’d always seen,” Paulson says. “There had always been co-heads. We’d had John Weinberg and John Whitehead and Steve and Bob. We didn’t have C.E.O.’s and C.O.O.’s. There was no C.E.O. We were a partnership. The senior partners were our bosses but everyone on the Management Committee had a vote, so no one could really dictate.”

After breakfast, the two headed to Central Park, where they walked and continued their discussion. Paulson remembers, “He kept saying to me, ‘You’re not going to believe what a good partner I am or how well we will work together.’ I remember thinking to myself: I’m not sure this is going to work. Am I going to do well at it? Am I going to like it? Are we going to work well together? And I certainly don’t want to be a senior partner that quits. So I want this to work.” From Central Park, they took a cab to Beekman Place. Paulson got out and went to speak with Friedman. Corzine went off with Bob Katz, his close ally.

When Paulson got up to the apartment, Friedman asked if he and Corzine had had a conversation. Paulson said they had. “Well, he told you he wants to be senior partner and have you be C.O.O.?” Friedman asked.

“I wasn’t quite sure what he was saying,” Paulson told Friedman.

“Well, that’s what it is. And I think you should do this.” Friedman later commented, “We came to believe their chemistry would be very good, and we had a good sense of optimism about it. They wanted to work together.”

That afternoon, the Management Committee reconvened at the U.N. Plaza-Park Hyatt Hotel. Friedman officially nominated the two men, who then spoke briefly and answered questions. While the committee discussed the nominations, Paulson and Corzine left the room and went to watch the U.S. Open men’s tennis final on television. Soon enough, the committee unanimously approved the new team, with Corzine as C.E.O. and Paulson as C.O.O.

A number of Paulson’s banking partners—for instance, Bob Hurst, Mike Overlock, Gene Fife—questioned his decision to be Corzine’s deputy. Recalls Paulson, “I remember afterwards a member of the Management Committee saying to me, ‘You shouldn’t accept this position.’ ” But he replied, “Well, I feel comfortable with this to the extent I can feel comfortable. I feel uncomfortable with the arrangement generally. But this is either going to work between Jon and me or it’s not going to work. And if it’s not, it’s not going to make any difference if we’re co-heads or whether we’ve got this other arrangement.”

Paulson now admits that this was most likely a justification for not getting the support he needed from the Management Committee to become a co-senior partner. “On the other hand, you just need to realize how fast this whole thing came upon me,” he says. “And what a huge thing it was. To move to New York, to be doing this job, to be tied as a co-head to someone I did not know.” Corzine was likable enough and friendly, a politician even then, but the two men could not have been more different.

Paulson says he did not see himself at the time as ready to be the sole senior partner: “I was not of the view that ‘I am ready to run this firm,’ that ‘I’m capable of running all aspects of it, I want to run it all, and, by God, I’m determined and I’m going to fight to do it.’ That was not my mind-set.”

As for the rumors about his health, Friedman denied them in a September 1994 New York Times interview. “My health is great and that’s how I want to keep it,” he said. “Only on Wall Street do people think it bizarre that I don’t want to spend half of my day on the telephone and the other half on an airplane.” He pointed out that he ran up to six miles every day.

Coincidentally, Paulson had his own health problems in 1994, although nobody inside Goldman Sachs was aware of them. Some people outside the firm recall his describing them as involving “cancer,” but Paulson says, “As a Christian Scientist, I don’t go to doctors and get diagnoses. I don’t believe I was dealing with cancer. I sure didn’t feel well for a period of time in early 1994, and in the summer of 1994, I remember working from home and doing a lot of praying for a couple of months where I felt no energy at all. I didn’t feel well until the problem was met. I have relied on prayer for health care all of my life.” He believes he has had many such “physical healings.”

One might have expected Hank Paulson and Jon Corzine to be alike. After all, they both grew up on farms in Illinois and both were non-Jews in a predominantly Jewish firm. But, in fact, their upbringings, careers, and temperaments had little in common. Much of Paulson’s early life revolved around his family’s 75-acre farm, in Barrington, Illinois, about 40 miles west of downtown Chicago. “We always had horses, hogs, cows, sheep, and chickens, not to mention my pet raccoon and crow,” Paulson wrote in his 2010 memoir, On the Brink. Paulson attended Dartmouth, where he played football and majored in English before deciding to attend Harvard Business School.

In January 1974, after a stint in Washington as an analyst at the Defense Department and then as a White House staffer, Paulson joined Goldman Sachs as an investment-banking associate based in Chicago, covering big industrial companies in the Midwest. His early years at Goldman were tough, but then he started getting a few breaks. “I was candid sometimes to the point of bluntness,” recalls Paulson. “That was my trademark.” For a young banker, without much experience, he had a lot of chutzpah. Sometimes clients would ask him to give them a breather and not call so often. But the word began to spread around Goldman that nobody worked harder, and his frugality and family values—Paulson didn’t drink or smoke or chase women—played well with upper management. To be sure, Paulson was no Boy Scout, and he made plenty of enemies at Goldman. “He’s an action-oriented person, and one of his great skills was identifying smart people and absorbing good ideas they had, and then pulling the trigger” is how one of Paulson’s rivals at Goldman, choosing every word very carefully, describes him.

Corzine was born and raised on his family’s farm in Willey’s Station, Illinois—population 40. His first job, when he was 13, was selling hot dogs at the county fair. In 1965, he went to the University of Illinois at Urbana-Champaign, 45 miles away. Eventually he moved to Chicago, where he worked in the back office at Continental Illinois National Bank while attending business school at the University of Chicago. Corzine wanted to work on Wall Street and finally got his shot in 1975, on the government-bond desk at Goldman. He showed up there for his first day of work “in a sport coat,” Corzine recalls. “I looked like a country hick.”

After mostly answering phones and getting coffee, he got his big break when a group of government-bond traders at Goldman walked out to join E. F. Hutton. It took Goldman months to hire replacements, and during that time, Corzine was pressed into service. “I made more money … than the desk had made in the previous couple of years,” Corzine says. “Pure luck, I’m sure, but it caught people’s attention.”

In 1980, after four and a half years, Corzine became a partner at age 33, a major accomplishment under any circumstances. In the mid-80s, Goldman decided to merge J. Aron and Goldman’s fixed-income businesses to create a supergroup called F.I.C.C., for fixed income, currencies, and commodities. Corzine was appointed as co-head of the group with Mark Winkelman.

Popular at the firm for his genial manner, Corzine also had his critics. “He is charming,” says one partner. “He’s got a really nice style. He comes in an attractive package, so although he has got a huge ego and huge ambition—which far exceeds his ability in both those things—he comes across in a laid-back, low-key, disarming style.”

The partner explains the origin of Corzine’s Goldman nickname: “Fuzzy.” It derived not only from his beard, but also because he was “a fuzzy thinker. He wasn’t crisp and wasn’t black and white. He fuzzed things when he communicated.”

Bad Blood

Right from the start, there was bad blood between Corzine and Paulson, and not because one was a trader and the other a banker—the usual reason given for tensions in full-service Wall Street firms. Rather, the antipathy between the two men was a visceral one, although at first, Paulson says, they worked “relatively well together.” The magnitude of the trading losses continued to grow during the last three months of 1994. Corzine focused on solving that situation, while Paulson oversaw the process of cutting costs by 25 percent, which on Wall Street meant cutting people. “When you’re boiling in oil, in the middle of a crisis, the challenges are so consuming there is no time for anything else,” Paulson says. “I certainly wasn’t focused on issues or problems with Jon.”

At the same time they had to undertake the Herculean task of getting partners to stay. “Partners were looking over their shoulders at each other, wondering who was going to jump ship next,” one vice president remembers. “There was an air of barely controlled panic as you watched people watching each other trying to decide [what to do] as decision time approached.”

A combination of a general improvement in market conditions plus the power of Corzine’s positive thinking began to have its intended effect. “Corzine had enormous energy, unbounded energy,” one partner says, “and he was, in that sense, an energizing element in the firm. From where I sat in 1995, he looked like a good thing.”

“Jon is inspirational,” David Schwartz, then a Eurobond trader in London, says. “He would come to London three or four times a year. We’d all go into the conference room, and we would leave feeling so great about being a part of Goldman Sachs Corzine was able to convey the culture in a really profound way.”

By the second half of 1995, Goldman had turned its business around. In the last six months of the year, the firm earned about $750 million, pre-tax, and would earn $1.4 billion in pre-tax profits for the full year.

To Corzine, the lessons of 1994 were clear. “Permanency of capital was essential,” he says. “I didn’t have religious fervor [about an I.P.O.] in 1986 [an earlier attempt to take the firm public], but I was supportive. I had religious fervor after 1994 because you can’t have a $250 billion balance sheet stretched around the world, operating 24 hours a day, built on capital that could walk out the door, and have no real transparency whatsoever about what you’re doing.”

By 1996, Goldman was the only major Wall Street securities firm that still operated as a private partnership, and there was no longer any doubt that it needed more capital to compete and also needed a new corporate structure to shield the partners from potential large liabilities.

While the passion inside Goldman about the I.P.O. would take a while to come to a boil, the rancor between Corzine and Paulson was heating up. The first bone of contention between the two alpha males was, of course, size. “Everything to him, if it was a position, if it was a hundred, he liked it better at 200, and he liked 300 better than 200,” explains one partner who knew Corzine well. From the outset, Corzine seemed infatuated with making Goldman Sachs a bigger firm, through acquisition.

Paulson’s first “shock” in this regard came in early 1995 when Corzine told him about his interest in buying the Wall Street trading powerhouse Salomon Brothers. The news “just hit me like cold water in the face,” Paulson recalls, although he resolved to do what Corzine asked of him—to meet with Salomon’s C.E.O., Deryck Maughan, to discuss the idea. Then he vowed to use the experience to “educate” Corzine about why putting the two firms together was not such a great idea. One senior Goldman partner remembers thinking about why Corzine seemed to be so keen on a Salomon deal. “He was a government-bond trader,” he says. “We hit Salomon Brothers at about the knees. And so he sort of looked up to them. They were the heroes for what he did.” Paulson did the analysis for a potential merger and talked with Maughan. Thanks to investor Warren Buffett’s financial rescue, Salomon had survived a scandal involving trading in Treasury securities in 1991. By 1995, however, Buffett had had enough; he wanted to sell Salomon and recoup his investment.

But to Paulson buying Salomon made no sense. “Their trading businesses overlapped with our trading businesses,” he says, without passing judgment on Salomon. “So you’re going to be twice as big in the government-bond business? This is not two plus two equals four. It’s two plus two equals three.” Then there was the fact that the firms had duplicative offices around the globe which would have to be closed, with scores of people dismissed. “It just was so obvious that it was absurd on the face,” one person says.

Next Corzine insisted Paulson talk to Sandy Warner, at JPMorgan. Warner had an idea that Goldman and JPMorgan should be merged, with Warner as the leader of the combined firm. That discussion went away even faster than the one with Salomon. JPMorgan had lost some of its “pizzazz,” Paulson says, and the idea of working for that management was a nonstarter. “Those guys thought they should run the organization, and none of us wanted to pursue that.”

The combination that made the least sense to Paulson—although it seemed to make great sense to Corzine—was the one between Goldman and Sandy Weill’s Travelers. Corzine begged Paulson to go meet with Weill and hear his reasoning. “I remember Sandy Weill saying to me his first choice was to buy Goldman Sachs because he needed an international presence, and his second choice was to buy JPMorgan,” Paulson says. “I said, ‘Sandy, what if neither one of those is available? Why don’t you buy Salomon? They’re available.’ Just to test him. And he told me all the reasons why he wouldn’t buy Salomon.” (In recounting the story, Paulson laughs uproariously because, in September 1997, Travelers bought Salomon Brothers for $9 billion.)

Paulson could not make sense of the Travelers deal, either. “I wouldn’t have known how to make the combination successful, particularly when there was, in my judgment, no strategic rationale,” Paulson says. “Size is the enemy of excellence in investment banking, particularly when you are trying to put together two different cultures.”

For his part, Corzine says the discussions with Salomon Brothers, JPMorgan, and Travelers were not in 1995 but actually in 1996 and after. (A later Wall Street Journal story did peg the Salomon discussion to 1995.) He says he agreed to have the meetings—a dinner with Sandy Warner here, or a “delegation” sent to meet with Sandy Weill there—because the bankers in his Financial Institutions Group, chiefly Chris Flowers, thought the meetings were good ideas. Corzine believes the discussions were just casual encounters between C.E.O.’s and not particularly serious, nor were they intended to be. Throughout these discussions, he says, he remained convinced that Goldman’s valuation would be higher if it conducted its own I.P.O. rather than if it merged with an existing public company.

Irritating as these overtures were to Paulson, it wasn’t only the mega-merger conversations that got him miffed about Corzine. There were also the failed efforts to acquire two money managers: Miller, Anderson & Sherrerd, with $33 billion under management, which Morgan Stanley ultimately bought, and RCM, with $26 billion under management, which eventually sold to Dresdner Bank. Corzine also wanted to open new offices around the world. “Jon wanted to do business in every country, everywhere, and wanted to be big,” one partner says. “He was like the guy going through a cafeteria, and he wanted to take everything and put it on his tray. That concerned people.” In 1995, Goldman opened offices in Shanghai and Mexico City and created joint ventures in India and Indonesia. Paulson thought Corzine was moving too quickly to open offices and seemed never to have met a location he didn’t like. A former partner remembers Lloyd Blankfein, then running J. Aron and now Goldman’s chairman and C.E.O., joking that “he was going to go away someday and wake up and find out we were opening up an office in Guatemala.”

For Paulson, the irony was that although Corzine was a much-beloved figure around the firm he was not an easy person to work with. Others noted that while Paulson often seemed not to be listening—his kinetic energy made him seem to bounce around in the middle of a conversation—he was actually considered a good listener. Corzine, on the other hand, often looked as if he were listening carefully but was not. (His beard and cardigan sweaters made him look avuncular, though.) “He loved the firm,” one former partner says about Corzine. “He was committed to the firm. He worked incredibly hard. That was the biggest part of his life. But he had a real hard time compromising, and that was a strange thing. To work jointly with someone, to work well with them, you have to be able to say, ‘O.K., on matters of ethics or principle or conscience, I hold my ground, but if there is something that the other guy feels very strongly about and it’s not irrational or stupid on the face, then you go that way.’ The key is to figure out what are the really big issues, and to Jon every issue was a big issue. He just saw it that way.”

Corzine also seemed to make loyalty the litmus test for everything. “When you’d say, ‘Here are the three reasons why this doesn’t make sense,’ he would never say, ‘Well, I disagree with you for this reason,’ and debate you,” says one member of the senior management of the firm. “He just would say, ‘I really think this makes sense’ and ‘Gosh, I’d like you to support me on this. I just know this would be good.’ He’d put his arm around people, and a lot of them would agree with him. But there were plenty of people at Goldman Sachs who didn’t want to do that…. It’s always been, at Goldman Sachs, more about a bigger group of partners than just the leaders at the time.”

The firm performed so well in 1996 and 1997 that a Goldman I.P.O. looked increasingly inevitable at some point during 1998, when the partners would reconvene for their biannual meeting. Whatever else could be said about Corzine and his management style, there was no denying that he had gotten the Goldman workforce out of its 1994 funk and focused intently on profits.

But Paulson remained unhappy. “The differences between Corzine and me became huge,” he says. “I was tired of bumping my head against a wall.” He believed Corzine surrounded himself with cronies who told him what he wanted to hear, and he was irritated by an increasing number of Corzine’s decisions. For instance, one particularly galling situation occurred when Paulson fired a partner in Chicago who had been caught having an affair with a 21-year-old secretary. Corzine reversed the decision and reinstated the partner in New York. And Paulson would hear from his friends that Corzine was going behind his back, trying to undercut him with other partners.

Before the Christmas break, Paulson went to see Corzine and told him he was thinking of leaving. “I said to him I didn’t think it was healthy for both of us to be here,” he says, “and that I was willing to leave. We just needed to negotiate the terms of my departure, because I wasn’t comfortable having him run the firm unchecked.” Corzine ignored him. “He didn’t really respond,” Paulson says.

Paulson used the Christmas vacation to think about how to deal with Corzine’s indifference. He went with his family to the Yucatán Peninsula for a little kayaking, birding, and fishing. His wife counseled him not to be rash, to think through his decision. “You’re miserable now,” she told him. “I want you to be happy. But just make sure you’re going to be happier if you leave.”

Mortal Blow

So Paulson went back into battle, and within weeks Corzine made a major political misstep—or at least that’s how it was taken by the other partners—handing Paulson the opening he had long been seeking, one that would give him the upper hand at the firm.

Chris Flowers, the highly respected financial-institutions-group banker, was one of Corzine’s closest allies at the firm. Flowers was classic Goldman—a math whiz and a chess champion in high school, who had gone on to Harvard, where he had majored in applied mathematics. “The first thing I learned at Goldman was how to work hard,” he explains. That first year he put in “365 days straight,” and Goldman paid him $16,000. By 1988, at the tender age of 31, he’d been named a partner, the youngest at the time to attain that distinction.

Corzine seemed utterly captivated by Flowers. They had worked together for 10 years, and Flowers had impressed Corzine with his understanding of both strategy and capital markets. “He was our franchise with financial institutions and he was extraordinary,” Corzine says. “I don’t think anybody would dispute that he was No. 1 or 2 in the world at giving advice to financial institutions.” Flowers went out of his way to introduce Corzine to the other leaders in the financial industry. “Some of the original introductions were actually from Chris,” Corzine says.

One of those introductions, early in 1998, was to Frank Cahouet, the C.E.O. of Mellon Bank. To Corzine, the potential combination of Goldman and Mellon made tremendous sense. Mellon had no investment-banking business (so no overlap) and a huge asset-management business, one of the key areas in which Goldman was looking to grow, plus a commercial-banking business that would allow Goldman access to a steady form of cheap financing—customer deposits. Mellon also had a nascent prime-brokerage business, which provided brokerage services to hedge funds and other large institutional investors, another area that Goldman was looking to build. “It was one meeting,” Corzine says. “I was more enthusiastic about that merger, though, than any of the others. If we had been able to get through the king-of-the-hill stuff, maybe it could have gotten done. But that wasn’t happening with Frank, and so it really wasn’t going anywhere.”

Corzine told Paulson about the meeting, that it was “very preliminary” but that it “made a lot of sense,” and that he thought he and Cahouet would be co-C.E.O.’s and Paulson would have the “much bigger role” of being head of the combined firms’ commercial- and investment-banking businesses.

Paulson believed, however, that Corzine’s “one meeting” with Cahouet was actually something more. In fact, Paulson worried that Corzine had already started negotiations to put the two firms together. Then, “after he was pretty far along, he said something to me,” Paulson recalls, “and then he said he wanted Chris Flowers to talk with me about it.” Flowers, whom Paulson described as “incredibly commercial, really bright, and quite straightforward,” had a startling message for Paulson. “Chris had explained to me that my stock would be worth $850 million after we got done [with the merger],” he recalls. “I remember they thought that would really do the trick [of getting me to go along with the deal].” After his meeting with Flowers, Paulson says, he spoke with Corzine and raised some objections—in particular that he thought Corzine might be getting ahead of himself, and that, if he was going to have another meeting with Cahouet, Paulson wanted to be there.

But Corzine said he was just getting to know Cahouet and wanted to do the next meeting by himself. He assured Paulson he wouldn’t get into any details; he was merely going to listen and take notes. Paulson wasn’t happy with this, but Corzine was the C.E.O. What could he do?

After Corzine had the second meeting with Cahouet, Paulson asked how it had gone and what had transpired. “Well,” Corzine told him, “I just listened. I didn’t get into any details.”

But Paulson called Flowers and asked him to come by and see him that day, which happened to be a Sunday. Flowers explained that Corzine had made a merger proposal to Cahouet, including specifics on the economics of the deal, the exchange ratio, and who would be leading which business units. “I got angry,” Paulson says.

At the Management Committee meeting the next morning, Paulson asked Corzine to describe what had happened between him and Cahouet. Corzine didn’t respond. “He gave a limp leg and basically said nothing,” one partner at the meeting recalls. Incredulous, Paulson then asked Flowers to join the meeting and give a briefing. Flowers came in and gave all the details of the discussion, just as he had done the day before with Paulson. “Jon got so mad and angry, he ran out of the Management Committee and into his office,” the partner says.

Corzine’s allies on the committee got angry with Paulson. “One person said, ‘You guys shouldn’t have done that. You’ve embarrassed him and now what if he quits or something?’ ” says someone who was there. But the majority of the Management Committee members were so irate at Corzine for discussing a merger with Mellon without their knowledge or consent—and then not coming clean about it—that they decided to prevent him from engaging in any future strategic discussions at all. The committee gave that responsibility to Paulson exclusively. Not a word of this decision leaked beyond the Management Committee itself. The discussions with Cahouet and Mellon were terminated immediately. Of the possible merger, Corzine says, “I think it got deeply exaggerated by some of the folks who wanted to use it as another excuse to say I didn’t know what I was doing.”

In the wake of the Mellon breach, Paulson openly feuded with Corzine. On the eve of what was looking to be a serious vote by the partnership, in mid-June, about the idea of an I.P.O., it was terribly unseemly to have the two senior partners running the firm clashing. Paulson decided he would leave Goldman if Corzine remained the firm’s sole C.E.O., and told his allies on the Management Committee of his decision. There was little doubt he was willing to follow through on his threat, but he must have known that the committee would insist that he stay. There was no way the firm could afford to lose him on the eve of the long-awaited I.P.O. A majority of the committee demanded that Paulson take the reins of the firm from Corzine. John Thain, the C.F.O., a onetime close ally of Corzine’s and then named in his will as one of the executors of his estate, was asked to speak with him about the committee’s decision.

Sometime around Memorial Day 1998, Paulson and Corzine met to discuss the decision. Corzine tried to talk Paulson out of it, or at least to persuade him to wait until the full partnership had voted on the I.P.O. at the upcoming mid-June retreat. But Paulson told him no, he would not wait. Corzine had to agree to the new arrangement immediately. The message delivered to Corzine was crystalline: “There’s a hard way and there’s an easier way.” Corzine took the news poorly. Those walking by his office that day recall that Corzine seemed to be physically sick, but he came around to the new reality. The “Glorious Revolution,” as it was known around the firm, was under way. Later, at a dinner with several other Goldman executives at the Park Avenue Café, Corzine and Paulson stood up at one point, and Corzine announced that he had decided to make Paulson his partner in running the firm. The two men then hugged, as the other men witnessing this brief—and highly unlikely—bromance rolled their eyes.